More Bad News for Elizabeth Holmes: Major Investor Sues Theranos for Fraud

A week after Theranos announced that it would be shutting down its blood-testing facilities, including all of its Wellness Centers and clinical labs, and laying off about 40 percent of its workforce, the embattled blood-testing start-up and its 32-year-old founder Elizabeth Holmes are facing yet another nightmarish crisis: one of its major investors, hedge fund Partner Management Fund LP, is suing the company, citing “a series of lies, material misstatements, and omissions” in a letter to its investors obtained and reviewed by the Wall Street Journal.

Partner Fund, which the Journal says invested almost $100 million in Theranos in early 2014, now alleges the company “engaged in securities fraud and other violations by fraudulently inducing the fund to invest and maintain its investment in the company,” according to a lawsuit filed Monday in Delaware court. The lawsuit claims Holmes and former Theranos president Sunny Balwani deceived Partner Fund and committed securities fraud, lying about the number of tests that Theranos’s proprietary Edison machine was capable of performing. A spokesperson for Theranos told the Journal that “the suit is without merit and Theranos will fight it vigorously. The company is very appreciative of its strong investor base that understands and continues to support the company’s mission.”

Theranos’s investors have remained largely silent since the Journal began publishing a series of damning reports over the past year questioning the legitimacy and accuracy of the company’s technology. Holmes, a Stanford dropout with a penchant for Steve Jobs-esque black turtlenecks, convinced investors to pour hundreds of millions of dollars into her company, eventually reaching a $9 billion valuation. Holmes won over tech media, telling reporters she would revolutionize the blood-testing industry with Theranos’s proprietary Edison device, which she claimed would be able to conduct diagnostic tests with a single pinprick.

"We are fortunate to have supporters and investors who believe deeply in our mission of affordable, less invasive lab testing, and to have the runway to realize our vision," Holmes said in a open letter published last week. Theranos has said it is pivoting away from its Edison blood testing technology to focus its efforts on the development of its new miniLab diagnostic platform, which Holmes unveiled in August.